>AMARA RAJA BATTERIES LIMITED (NIRMAL BANG)

Snapshot
Amara Raja Batteries Limited (ARBL) is engaged in the production of storage batteries used in the industrial and automotive segments since 1985. ARBL entered into a JV with Johnson Controls Inc, USA for the import of technology for the manufacture of Automotive (SLI) batteries.

Investment Rationale
■ ARBL earns 55% of its revenues from Industrial VRLA batteries that cater to the sectors such as Telecom, Power & Railways which we believe are high growth & high margin businesses & have grown at a CAGR of around 50% over a period of last 5 years.

■ The slowdown in the Auto sector seems to be over with revival in auto sales in the first quarter of this financial year. Apart from this the replacement markets are expected to boom as the industry had witnessed double digit growth in last five years. The replacement market contributes 66% of the company revenues from Auto segment and has margins in the range of 20‐22%.

■ The Company is planning to incur a capex of Rs. 90 crores in the current year to expand it two‐wheeler battery capacity from 1.8 mn units to 2.4 mn units & UPS batteries from 1.2mn units to 1.8 mn units. Two wheeler batteries command higher margins in the range of 25‐30% & will help improve overall operating margins of the company.

■ ARBL batteries are used to power air‐conditioning in AC coaches of Indian Railways, which already has added 45350 new‐age coaches and further plans to add 22869 more, which we believe are a ready market for ARBL batteries.

■ With a mobile penetration of just 38% in India as against 60% in China, we feel there is enough scope of growth for the telecom sector. With ARBL a preferred supplier to almost all telecom operators in the country, the growth opportunities seem tremendous.

■ ARBL batteries support the transmission & distribution networks of Power stations. Increased spending by the government in the power sector will boost demand as government plans a 48% growth in transmission grid growth in the eleventh plan.

Valuation Recommendation
At the current market price of Rs. 100 per share, ARBL is currently trading at a PE of 6.3x FY10E and 4.8x FY11E EPS estimates, which looks quite attractive when compared to its peers. At Rs. 100 per share the stock is trading at a discount of 69% from our intrinsic price of Rs. 169 per share
which is 10.7x FY10E and 8x FY11E earnings. We recommend a BUY rating on the stock with a long term view.

To see full report: ARBL